In Spite of Positive GDP Reading, Caution Still Justified

The reading on total U.S. economic output as measured by Gross Domestic Product (GDP) marked its 10th consecutive positive quarter, reaching 2.8% in the final months of 2011. Coming on the heels of better-than-expected economic readings over the past few months, this is welcome news. Consumption, which comprises 70% of U.S. economic activity, generated a strong gain of 2% in the final quarter of last year. Another positive sign is the reduced reliance on temporary workers by companies as they shifted to more long-term full-time employment during the second half of 2011. At the same time, companies continue to reduce lay-off announcements, sending first-time applications for unemployment benefits down to levels not seen since before the recession.

Commercial real estate investors should take the latest economic reading with due caution for several reasons. While the economy has outperformed expectations and defied a double-dip recession, the pace of growth is unlikely to accelerate further in the short to midterm. In fact, inventory restocking was a major contributor to the fourth-quarter GDP gains and was temporary in nature. Weak government and business spending also point to lower growth rates in the first quarter of 2012. Companies are adding workers at a relatively subdued rate, restraining any significant improvement in the unemployment rate. Macro concerns, escalated recently by Middle East tensions and coupled with the U.S. political log jam, will limit risk taking, keeping growth rates on a steady but unspectacular trend line.